Money Managers Live

Don't Hang Yourself... Look to the future and re-allocate your portfolio accordingly

Written by Dave Young, president

Last week I was look through various stock market charts when my 14-year-old son walked into the room. He asked me what I was looking at.

I thought I would have a teaching moment and began to explain how markets move up and down in cycles. After silently looking at the charts he responded,"If that was my money, I would hang myself!" and walked out of the room.

While I thought his response was a little harsh, I do understand that most investors are very discouraged after such a difficult year.

So how bad has this market been? Consider the following:

--Warren Buffet, considered an icon of wise investing, lost almost half the market value of his accounts between the middle of September and the middle of November.

--Bill Miller, one of the only managers to beat the S&P 500 for the past 15 consecutive calendar years through 2006, is down almost 60 percent year to date through December 3rd.

--Dan Fuss of Loomis Sayles is a renowned bond manager. Bonds are traditionally very conservative and are used to stabilize portfolios. His highly regarded bond fund is down an incredible 28 percent through December 5th. He said this is a "once in a 50-year" buying opportunity.

--Icon Funds, a value-based mutual fund manager, put out a report stating that stocks are 60 percent undervalued.

--High Yield bonds actual default rates are currently at 3.1 percent. However these bonds are currently priced as if the default rate was 17 percent.

Not to understate the obvious, but investment markets are difficult. They do whatever is necessary to cause the most grief to the largest number of people.

The market continuously trains investors to be in the wrong place at the wrong time.

When markets are strong and moving up everyone wants in and is aggressively buying. That is often the wrong time to be putting money into the market.

Conversely, when markets are bad and going down, everyone is selling and no one wants in. That is usually a good time to invest.

Occasionally, you get market conditions that are horrible (like now) and investors are acting irrationally in extreme panic. At this point in the cycle, investors begin to sell at any price. This is the stage when investors begin effectively "giving away" their investment in order to get out of them.

Historically, this has been a phenomenal time to invest and buy new positions. Moving up from extreme lows is when fortunes have been made after previous bear markets.

I believe investors are positioning themselves in the wrong place at the wrong time once again. As evidence, simply look at the record amount of money that has been moving out of stocks and into cash, money markets, bank Cd's, and fixed annuities. At a time when 30-year treasury bonds are paying a record low 3 percent yield, in a quest for safety, investors are running as fast as they can to lock in those low yields... at just the wrong time.

Looking forward over the next three to five years investors have a choice:

--Invest in money market funds; bank Cd's, fixed annuities or treasury bonds. These will guarantee returns in the 2 to 4 percent range. Your money is locked up at historically low interest rates for 3 to 7 years with significant surrender charges if you change your mind.

--Invest in a well diversified, strategic portfolio made up of beaten down bonds, stocks and real estate. Our portfolios are currently positioned to capitalize on areas of the market that historically recover the fastest (visit our website www.paragonwealth.com to see examples of recommended portfolios).

This panic has pushed stocks down to the same levels they were 11 years ago. We won't know until after the bear market has ended that it is over, but we do know that returns after previous bear markets have been exceptional.

Looking backwards or following a "rear view mirror investing" strategy, usually causes an investor to invest in the wrong place at the wrong time.

Our portfolios are currently reallocated based on opportunities going forward. When the market finally turns positive we will continue to adjust our portfolios based on which areas are showing the most strength.

Warren Buffett Says Now is the Time to Buy

Warren Buffett is known as one of the most famous investors, businessmen and philanthropists in the world.

It is interesting that he is calm at this time when everyone else is panicking. He has told other investors to buy because he is.

Below is an article that was on Bloomberg's site today.

Oct. 17 (Bloomberg) -- Warren Buffett said he's buying U.S. stocks and, if prices stay attractive, his personal investments, as distinct from his stake in Berkshire Hathaway Inc., will soon be wholly in American equities.

Writing in the New York Times, he said he's following the principle: be fearful when others are greedy, and greedy when others are fearful.

Exaggerated concern about the long-term prosperity of the many sound U.S. companies is foolish, and most will probably be setting profit records in years to come, Buffett said.

While short-term stock-market movements can't be foretold, the likelihood is that the market will recover before the economy or general investor sentiment do so, and ``if you wait for the robins, spring will be over,'' he said.

Referring to the 1930s depression, Buffett pointed out that the Dow reached its nadir on July 8, 1932; economic conditions continued to deteriorate until Franklin Roosevelt became president in March, 1933, but by that time the market had climbed 30 percent.

Bad news, Buffett concluded, is an investor's best friend, for it enables you to buy ``a slice of America's future at a marked-down price.''

A Review of Our Investment Strategy

As seen in Paragon's second quarter 2008 print newsletter

Written by Nathan White, CFA

Photo by Kevin Dooley

We've had a good year so far relative to our benchmarks (S&P 500 and Lehman Bond Index).

Our models kept us fully invested during March as the credit crisis hit full steam with the Bear Stearns collapse unfolded and the markets sold off.

I must confess during that time the mood was so foul that I kept “wishing” some of our models would get the Top Flight portfolio to some cash. The mood got so foul that our sentiment indicators all reached extreme levels where they tend to produce very accurate signals.

For example, one short-term sentiment indicator that we use is the CBOE Put/Call ratio. It reached an extreme level during the middle of March and on August 16^th and the first part of March in 2007. The markets rallied nicely after each of these signals.

Because the market sentiment was so low during March it kept many investors on the sidelines causing them to miss the rally that lasted through April. During June it produced a sell signal and we have subsequently reduced our exposure in the portfolios.

Our intermediate to long-term models are still on buys or holds and we will wait for them to produce sell signals before reducing our exposure any further. One of my favorite long-term models measures the fundamental and technical strength of stocks in the S&P 500. Each stock is rated as a buy, sell, or hold and the model provides signals based upon the percentage of stocks with buy or hold ratings.

This is a sort of “bottom-up” analysis that is used in conjunction with other “top-down” macro-type indicators. This signal was bearish ahead of the 87 crash, the 1990 and 1994 bear markets, the 1998 Asian currency crisis, and the tech meltdown at the beginning of decade. So far through 2008 and for all of 2007 this model has not produced a bearish signal so perhaps what is occurring with the credit crisis will not end up being as bad as is widely expected.

With the continued strength of oil and other commodities our screens are subsequently dominated by energy and natural resource sectors and industries. In June we reduced our exposure to the energy areas as we felt that most of the upside has already been seen with many of these areas and any further return is not worth the risk.

Our screen also has us invested in the transportation sector which with the price of energy one would think would be at the bottom of the list. It has so far performed better than the market on a relative basis and if energy does take a dip it has some good upside potential. The summer is generally a weaker period for the markets as a whole so we will look to our models to guide us through. Stay tuned.